Mortgage Interest Rates Are Rising: How Does This Affect Me?

As many prospective and current homeowners are finding out, mortgage rates are on the rise. The unwelcome rate hike is coming at a time when many Americans are being pushed to their financial limits. If you’re wondering how high interest rates are going to affect you, keep reading. This article will address just that. We’ll also share some tips you can use to reduce your homebuying costs despite the volatility of the housing market. 

Mortgage Interest Rates Today Are Rising 

Fannie Mae estimated that the average 30-year fixed mortgage rate would increase from 3.1% to 3.3% in 2022. And the Mortgage Bankers Association predicted that mortgage rates would climb up to 5% by the end of 2022. These estimates were far too generous – the interest rate at the time of this writing (6/28/22) is 5.95%. This is an extremely high interest rate average, the likes of which we haven’t seen in over a decade. So, you’re right to be concerned about the implications of high mortgage rates. 

The current interest rate hike is driven by a number of factors, including: 

• World events
• Economic crises
• Inflation
• Fallout from the COVID-19 pandemic

When interest rates rise, your homebuying costs rise as well. We’ll get into specifics in the following section. 

The Effect of High Interest Rates on Your Pre-Approval

Pre-approval letters are regarded as promises rather than guarantees. When you get your pre-approval letter, your quoted mortgage rate is considered a floating rate. That means it rises and falls according to housing market rates.

Before your interest rate is locked in, each interest rate increase raises your monthly mortgage payment. Only after signing your purchase agreement will you get the chance to lock in your mortgage rate. Alternatively, you can opt to keep the floating rate if you think the interest rates will eventually go down. Either way, you’ll typically be required to lock the rate in 5 days before closing, at the latest.  

How High Mortgage Interest Rates Affect Your Monthly Payment

Rising mortgage rates mean your monthly payments may increase. This is particularly true if you have an adjustable-rate mortgage, which fluctuates with the market. Even a small rate hike can add up to thousands of dollars in increased mortgage payments over the course of a year. Luckily, if you have a fixed-rate mortgage and have no intention of selling, the climbing interest rates should not affect your monthly payment. 

Fixed-rate mortgages have a stable interest rate that doesn’t change over their lifetime. Even if your other expenses increase, your monthly mortgage payment should remain steady. However, you’ll still be subjected to interest rate increases if you sell your home, take out a new mortgage, or refinance. 

How To Afford A Home Despite High Interest Rates

Life doesn’t stop, even in the face of high interest rates. If you are in the market for a new house, you’ll be glad to know that there are steps you can take to counteract the rate hikes. Keep reading to learn how to afford a home in your budget even with a high interest rate. 

• Shop around before you decide - The most critical aspect of securing a mortgage is understanding all of the options that are available to you. Don’t jump at the first opportunity that looks good, or you could be missing out on a much better deal. If you aren’t comfortable sorting through different options and crunching the numbers on your own, consider getting an independent mortgage broker. They’ll simplify the process and help you find a mortgage with a rate that gels with your budget.  
• Improve your credit score – Improving your credit score will help you obtain a more favorable mortgage interest rate, avoid fees, and qualify for better loan conditions. If your credit is suffering, you might want to hold off on buying a home until it’s at least a 620. You won’t be able to increase your score overnight; here are a few ways you can improve your credit score over time:
• Ask for higher credit limits.
• Pay your credit card balances on time and in full.
• Diversify your credit mix. 
• Check your credit report for errors.
• Become an authorized user.
• Use a secured line of credit.
• Build your credit with rent and utility payments.
• Put up a larger down payment - Saving up enough cash to put up a substantial down payment will help lower your loan-to-value ratio and qualify you for lower interest rates. It can also reduce your extraneous fees, including private mortgage insurance.
• Buy sooner - Although interest rates are rising, buying now means you can lock in your mortgage rate before they rise any further. If you can still afford a home in the current market, it might be worth buying sooner rather than later. Additionally, rising interest rates can actually make it easier to buy a home! Although the interest rate is high, there is less competition. According to supply and demand, fewer applicants means that sellers typically lower their prices to help lure in prospective buyers. 

• Wait things out - Interest rates are cyclical, so if you wait long enough, they will eventually drop again. How long you're willing to wait is entirely up to you. If you aren't in a rush, you might be able to save a lot of money by waiting for more favorable interest rate conditions. 
• Consider getting a fixer-upper - Are you handy with power tools? If you are or have any interest in learning, it might be worth it to get a fixer-upper. Getting a fixer-upper can save you 10% or more on the total price and lower the cost of your monthly payments. Just make sure you get a thorough inspection so you can avoid hidden expenses. 
• Use the 28% rule - The 28% rule states that your monthly mortgage payment should be less than 28% of your monthly income. Start by figuring out what 28% of your personal or shared monthly income is and use that to determine your homebuying budget. Using a little more than a quarter of your monthly income will give you much more wiggle room and allow you to save up for surprise expenses. If you can’t afford the house of your dreams on just 28% of your income, you might want to wait until your income rises further. 

• Be more flexible with the type of property - Although single-family homes are the preferred home type, they are not cheap by any means. Keeping an open mind on the property type can introduce you to your dream home, even if it looks slightly different from what you initially expected. In addition to traditional single-family homes, there are: 

• Manufactured homes
• Co-ops and condominiums
• Townhomes
• Multi-family homes
• Tiny homes

These home types will leave you with some money in your pocket.

You may need to do a combination of the above to make your new mortgage affordable for you. Not all of these tips will work for everyone’s financial situation. 

Mortgage rates today are on the rise, but luckily, there are a few ways you can fight it. Before taking out a mortgage, spend time taking stock of your current and future financial situation and use that to guide your decisions. We hope this article has answered all of your questions and helped explain how the rising interest rates will affect you. With the tips in this article, you can navigate these unprecedented times from an educated perspective.